Fannie and Freddie pullback would devastate economy

Source: Reuters-USA

By Patrick Rucker – Analysis

WASHINGTON (Reuters) – If anyone thinks the current U.S. housing downturn is bad now, things would get far worse if Fannie Mae (FNM.N: Quote, Profile, Research) or Freddie Mac (FRE.N: Quote, Profile, Research) were to suddenly stop buying mortgages, a move that would drive up the costs of home loans and devastate the economy.

Fannie Mae and Freddie Mac, the nation’s two largest sources of mortgage finance respectively, recently reported combined losses of $3.5 billion. Borrowing costs have skyrocketed and investors have erased billions of dollars in each company’s equity market capitalizations.

Few think the two companies are likely to pull out of the housing market, even temporarily. However, if the stream of home loan failures were to force the companies to suspend new mortgage investments, the market for mortgage bonds would “freeze up,” said Tom Sowanick, chief investment officer of Clearbrook Financial LLC in Princeton, New Jersey.

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